Market Pulse: Using the first week as an indicator

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INCLINE VILLAGE, Nev. - The market began this year exceptionally strong, rallying 1.7 percent in the first five trading days of the year. That's important according to legendary analyst Yale Hirsch, who popularized the phrase, "As January goes so goes the year." He found that activity in the first five trading days is a good predictor for what will happen the rest of the year. Let me explain.

Since 1937 there have been 49 years that have seen the Dow advance in the first five trading days of the year. Of those, 38 continued to advance the remainder of the year with an average gain of 8.0 percent. The maximum gain was 43 percent in 1954 and the maximum loss was 28 percent in 1974.

Looking at the data more closely, Jay Kaeppel, author of Seasonal Stock Market Trends, found that the size of the gains during the first five trading days of the year matter. Specifically, if the Dow gained more than 3 percent during the first five days then it advanced an average of 15.4 percent the remainder of the year.

If the Dow gained more than 2.2 percent then the average gain the rest of the year was 12.5 percent. If the Dow gained more than 1.5 percent then the average gain the rest of the year was 10.4 percent. Finally, if the Dow advanced but gained less that 1.5 percent during the first five trading days, then the average gain was 5.3 percent.

So what does this mean for 2013? Since the Dow advanced 1.7 percent during the first five trading days of the year, there is a 68 percent probability that the market will continue to advance through the remainder of the year. Using data dating back to 1937, the market should continue to gain about 10.4 percent by the end of the year.

Of course this is where I should say that past performance does not guarantee future results. Nevertheless, this indicator worked last year and I'll be happy with a repeat performance!

- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.